Personal Debt Reduction Tips for Long-Term Financial Health

The faster you can achieve personal debt reduction, the less money you will spend unnecessarily on interest and fees. Keeping your personal debts low builds your credit score, offers you safety in the case of an emergency and helps build your net worth. Try these tips to reduce your personal debt and improve your financial health for the long run. 

Always Budget for Your Debts

Many people with long-term personal debt simply did not budget properly before taking their loans. Lenders will extend loans to any borrower who has the income to repay, even if this repayment will be long and costly. For example, the Federal Housing Agency will only insure loans at a fraction of the private lender's limit. Don't trust a lender to tell you what you can afford. Instead, consider your budget before you take a loan.

Start by determining your monthly income. Divide this in half. The first half will go toward fixed income expenses, and the second half is yours to allocate between savings and spending money. Once you know how much you can afford to pay to fixed expenses each month, subtract your rent or mortgage, car payment, student loan debts and other monthly expenses. The remaining sum is what you can afford to pay monthly to a new personal loan. 

Only Take Loans to Build Assets

Many borrowers make the mistake of taking loans to spend on luxury items. For example, lenders will give you a loan for vacation, a television or a new wardrobe. Ask yourself whether this loan will have a return in the future. If you are purchasing an asset, such as a car or house, the loan will have a return. If you are simply using debt to live beyond your means, there is no return on the debt. Avoid debts without returns.

Avoid Compound Interest

Simple interest installment loans are the most affordable loans available. You take a loan for a given amount, determine the amount you will owe in interest over the life of the loan, and repay the debt in regular payments while the loan is active. You will never see your principal debt go up, because your interest rate does not compound each payment period. With a credit card, on the other hand, you never truly know the expense of your debt. As interest rates compound, you may find yourself more indebted than you ever anticipated.

Don't Fall for Reduction Scams

If you find yourself deep in debt, the best option is to stop spending and start paying off your loans. Entering a consolidation, reduction or settlement arrangement can compromise your credit and result in unknown costs. Only pursue these options when the cost of repayment is high enough to counter the cost of pursuing debt solutions. You may also choose to pursue debt solutions if you suffer a fiscal emergency, are approaching bankruptcy, or determine you will not reasonably be able to repay your debts without incurring extreme hardship. Always research a company offering debt solutions prior to entering any agreement.

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